Time to Worry: World Oil Production Finishes Six Years of No Growth

As oil prices rose ever higher in the last decade, the optimists kept predicting rising production capacity and plummeting prices. Looks like they got it wrong.

We are entering what may be the longest stretch of no growth in world oil production since the early 1980s. But the reasons for that lack of growth differ in ways that ought to make us all uncomfortable.

Starting in 1980, production slumped because for the first time in history people needed less oil. After the huge oil price increases in the 1970s, cars suddenly got smaller. People became more careful about combining trips to save gas. A lot of people switched their home heating to natural gas which was considerably cheaper than heating oil. And, in the United States the Congress severely restricted the use of oil for new electric power generating plants. Those using oil began to switch to cheaper natural gas and coal. The whole globe went on an energy efficiency binge.

Beyond this, the world went through two recessions, one in 1980 and the second in 1981-82 which turned out to be the worst since World War II (until the current one). That curbed oil demand as economic activity sank. All the while, large oil discoveries in Alaska and the North Sea and furious drilling elsewhere produced a glut of capacity that sent prices from a high near $40 a barrel in early 1981 to about $16 a barrel six years later. As it turned out, all of these factors combined to keep world oil production below its 1980 peak until 1988.

Fast forward to 2005 when conventional oil supplies stopped growing and then fluctuated between 73 million and 74 million barrels per day on an annual basis through 2010. (Production averaged 73.8 million barrels per day this year from January through July, the last month for which data is available.) The chain of events following the 2005 peak are both different and worrisome. Following the cessation in growth of conventional oil supplies, the world economy continued to grow until the end of 2007 when it slipped into recession. Prices peaked in July 2008 at around $147 a barrel.

But then they plunged to around $35 a barrel in December 2008 as the world sank into an economic slump worse than anything since The Great Depression. With it oil demand and production slumped as well. Then the price did something that few people expected. It bounced back even as overall global economic recovery remained sluggish. Rapid recovery in the Far East, however, created robust demand for oil even as North American and European countries remained locked into an unusually tepid rebound. As a result, last spring prices for Brent crude vaulted above $125.

Six years from the ostensible topping out of conventional petroleum production, prices remain considerably higher. Oil prices finished 2005 around $50 a barrel. As of this writing, they are around $90 for Nymex crude and around $110 for Brent crude. This, of course, is exactly the opposite of the trend which occurred in the six years following the 1980 peak. Today, the often predicted rise in conventional supplies has failed to materialize, flummoxing the optimists so much that they simply ignore the data and talk of wonders yet to come.

Astute observers will say that this is not the whole picture. After all, high prices for a resource also stimulate substitutes for that resource. And, true enough, the substitutes for oil are starting to arrive. But the big question is: Will they arrive soon enough and at a scale that is large enough to make up for the current stagnation in the rate of oil production and the eventual and certain decline in that rate? So far the answer is no.

What the U.S. Energy Information Administration, which is the statistical arm of the U.S. Department of Energy, used to call "total oil production" has now morphed into so-called "total liquids production." It's a tacit admission that conventional oil supplies cannot meet all our needs. But even total liquids production--which includes ethanol, biodiesel and natural gas liquids--has moved up only a paltry 2.6 percent during the entire period from the end of 2005 to today. Hence, the continuing high prices for liquid fuels.

Now, it's not as if high prices haven't sent people looking for more oil and working on more substitutes. The problem is that all of this activity is facing a considerable headwind. It's called depletion. And, as they say in the oil patch, depletion never sleeps. It's going on in every operating well in every country around the clock, 365 days a year. Estimates suggest that the decline
in current production capacity might be around 4 percent per year. That means that 4 percent of the current production capacity for oil must be replaced each year just to break even. And, of course, to grow supplies, new production capacity must exceed this amount. But it hasn't, and oil substitutes haven't really grown by any significant amount in the last six years either.

The media loves to announce new seemingly large discoveries of oil as if they are the solution to what is really an unfolding liquid fuels crisis. They point to the Tupi field off Brazil which is purported to have 8 billion barrels of oil in it. And, they point to discoveries in the deepwater Gulf of Mexico thought to contain between 3 and 15 billion barrels. And, they point to the 4 billion barrels in the Bakken Shale in North Dakota. It all sounds like a lot. When I ask audiences how long a billion barrels of oil will last the world at current rates of consumption, I often get replies that range anywhere from three months to 5 years. The correct answer is 12 days. Just multiply these multi-billion-barrel discoveries by 12, and you'll realize right away that they are not going to overcome the constraints we are experiencing in oil supplies.

Something else has to give, and that something is probably going to be consumption. Either consumption will decline as the result of a new slump in the economy--a slump partly caused by high oil prices--or it will decline because high prices will encourage people to be more frugal in their energy use. Many of the poorest in the world will no doubt have to do without.

There is a third way. We could now begin a crash program to reduce our consumption of oil through new efficiency standards, higher energy taxes, expansion of convenient mass transit, and new energy-wise personal habits. All this would hurry the transition away from an energy source that will only become more problematic over time.

The optimists would have you ignore the oil production and price data of the last six years. It's as if they are channeling the late comedian Richard Pryor known for his trademark phrase: "Who you gonna believe? Me or your lying eyes?" After six years of flat oil production in the face of record prices, it's time to start believing your lying eyes.

"In the absence of new investment to increase oil production, oil output is set to decrease by 9.1% per annum. This is the conclusion of a report by the International Energy Agency. Now this is staggering. I have mentioned that figures of a 2 -3% decline following peak oil have been proposed before, but this is a real plummet off the peak. As a rule of thumb, a decline of 2% means painful adaptation, a 5% fall signifies very painful adjustments and 10% portends wholesale societal disintegration."

But even 4% is no joke if we don;t prepare for it. The Transition Town movement, active here in Britain, aims for an "Energy Descent Plan", thought probably to amount to -5%/year, by building local resilient/sustainable communities and moving away from the global urge toward unchecked growth.

Clearly we are seeing the limits to it, in terms of the oil supply which underpins the whole mechanism. The new "Growth" will be found in building new communities and societies that depend far less on fossil fuels, and that most immediately means curbing our use of oil

Oil substitutes are not as energy dense as oil and some of those substitutes actually consume some of the real oil, in their production (a kind of double counting).

According to the BP statistical review of world energy, even petroleum products combined (excluding substitutes) has barely increased since 2005. In that year, 81.485 million barrels per day were produced, whilst in 2010 that only increased to 82.095 million barrels per day. So it looks like all classes of oily stuff have stagnated and only the substitutes have kept total liquids growing though it would be interesting to know how the energy content of available produced liquids has altered over the last half decade. I suspect it has declined.

Ultimately, increased efficiency does nothing if population growth is not constrained. In fact, growing population on the basis of efficiency gains makes society even more vulnerable since any capacity buffers against downturns in supply are reduced. Every time we tell people what to do about declining resources we need to emphasise that not increasing the number of consumers is an essential element.

Much more critical than global oil production is AVAILABLE NET EXPORTS - after imports by China and India. Global exports peaked in 2005. Since then, Available Oil Exports (After Chindia) have declined 13%.

See Jeff Brown Three Strikes and your out. "The database shows that GNE increased from 39.1 mbpd in 2002 to 45.5 mbpd in 2005 (a 5.1%/year rate of increase). At this rate of increase, GNE in 2010 would have been at about 59 mbpd in 2010 yielding a volumetric increase of more than 13 mbpd over 2005. This increase would have provided ample room to accommodate increasing demand from Chindia, but that is not what happened.

The database shows that GNE fell from 45.5 mbpd in 2005 to 42.6 mbpd in 2010, a volumetric decline of about three mbpd.

More importantly, what I define as Available Net Exports (ANE), which are GNE less Chindia’s combined net oil imports, fell even more sharply, from 40.4 mbpd in 2005 to 35.1 mbpd, a volumetric decline of about five mbpd."

As the old saying goes: if wishes were fishes, we'd all have some. It's way past the time to stop the BS and start facing reality. We're in one helluva bind. There's no stopping the decline in existing fields, alternatives are fantasy and we're neck deep in wishful thinking.

Mass media is pure propaganda and, simply, writing what they know nothing about. It's now a game of lies/deception. Who is going to set loose the panic that is surely coming?

Chris Rhodes is quite correct that lack of transparency in oil information means we don't really know what the decline rate of existing fields is.

Tony Weddle correctly points out that many so-called substitutes are what margarine is the butter. They only resemble the real thing superficially. Natural gas liquids and ethanol have between 60 and 70 percent of the energy contained in an equivalent volume of oil and lack oil's versatility.

Michael Lardelli is correct to say that efficiency doesn't matter if there is no cap on total energy use. That cap might come in the form of peak oil, peak coal, and peak natural gas. It could be voluntarily imposed through tradeable energy quotas which decline slightly each year. And, of course, it could be addressed, as he suggests, by working to reduce world population. I don't think we have time for that solution since even if it were to be pursued in earnest, it would take decades to work. So I am inclined to the tradeable quotas idea.

I am well acquainted Jeffrey Brown's work on net exports and David Hagen is right to point out that the competition for available exports (which are dropping already) will actually precipitate its own crisis, and perhaps it already has.

Amit rightly points out that the lost of Libyan oil contributed to declines after January 2011. But the one-time loss does not explain the entire decline this year.

John Smith either can't do math or doesn't know his facts. The estimated reserves in the Canadian tar sands are in the range of 180 billion barrels. With worldwide consumption running at around 31 billion barrels per years, that would be a little less than 6 years of supply. And, this would, of course, allow for no growth in consumption. As for electric cars and biofuels reducing the need for oil, he is forgetting about the huge demand for oil in China and India as drivers and industry there consume more and more oil despite these developments in vehicle fuels. As I indicated in my piece, when the optimists are confronted with the facts, "they simply ignore the data and talk of wonders yet to come." Mr. Smith proves my point.

I couldn't agree with Eugene more. It's time to "start facing reality."

Mr. Smith shows us again that he is challenged in his understanding of the oil industry. The numbers he states for the Canadian tar sands and for Venezuela are for total resources. Only a small fraction of these resources will ever be extracted profitably. The definition of a reserve is what can be extracted at current prices, from known fields using current technology. That number for the tar sands is around 180 billion barrels. The amount of so-called technically recoverable oil thought to reside in the Orinoco oil belt in Venezuela has been put at 513 billion barrels. This number is far less than the number he quotes. And even this number doesn't tell us whether such oil will ever be economically recoverable.

He mentions Rex Tillerson as a credible source for oil information without telling readers that Tillerson is the CEO of ExxonMobil and has every incentive to exaggerate oil supplies since his company's prosperity depends on people remaining addicted to fossil fuels. Mr. Tillerson, however, refers to "resources" not reserves, a sleight-of-hand designed to confuse listeners. Also, this is Mr. Tillerson speaking in 2007 when oil is $60 a barrel and before the long plateau we've experienced became a reality.

Peter Huber works for the libertarian Manhattan Institute which spreads ecologically indefensible ideas about infinite growth on a finite planet. He says what he says because he is paid to say it. Like so many optimists he, as I said above, simply ignores the data and talks of wonders yet to come.

Also, perhaps Mr. Smith is unaware that Chinese car sales exceeded U.S. car sales for the first time in history. If his sanguine view about energy is based on the idea that the Chinese and the Indians are too poor to participate in the hydrocarbon fiesta, he needs to reexamine the facts.

Turns out the peak oil crowd was right about stalling production and skyrocketing prices this past decade. Certainly, it is very difficult to predict the exact timing of a one-time event in human history and there have been some premature calls before. But since energy infrastructures take a generation or two to replace, it's important to get a head start on an energy transition. Mr. Smith thinks we should put our energy future in the hands of people who've been consistently wrong about supplies and prices in the last decade.

I'm afraid it's you who doesn't understand the oil industry, or else you would understand the concept of "reserve growth".

At any rate, I know there is no hope of reasoning with you on this subject. "Peak Oil", and "Global Warming", have become new religions for some. They spend large amounts of their time obsessing over it. And doing their best to try and convince the "non-believers" of the impending doom.

The subjects may have become a profitable business for you, with your book sales, and speaking engagements. It certainly has become profitable for Al Gore! No worries, the fools that fork over their cash to hear this nonsense, would have squandered it on some other fraud. As someone once said "there's a sucker born every minute".

Mr. Smith has now shown us his hand. He is a climate change denier, most probably a troll hired by the fossil fuel industry to comment on articles just like this one and to do it with bad manners and personal attacks as well.

As for his claim that I do not know about reserve growth, I am well aware of it. But all the reserve growth in the last several years has had absolutely no success is raising the rate of production, and rate is the key metric. To use an analogy, you may inherent a million dollars, but if the terms of the trust prevent you from withdrawing more than $500 a month, you may be a millionaire, but you will never live like one.

The resource for oil may be large, but the economic viability of the remaining deposits is suspect. And, technology is now failing to provide the wherewithal to increase production. But then Mr. Smith, as a climate change denier, has already shown us that he is impervious to data. The data doesn't matter to him, only his precious rigid anti-science ideology. Perhaps that ideology will be enough to power him in the future. But for the rest of society, I would prefer real practical solutions to energy depletion and climate change.

Which biofuels did you have in mind for replacing oil and in which millenium did you have in mind? No doubt you are expecting miraculous breakthroughs in cellulosic ethanol and algae biofuels. Shame about the thermodynamics.

How is all the electric power for the electric cars going to be produced. Wind and sun? Best of luck.

Perhaps you could enlighten us how these oil sand resources are going to be produced in quanitities that will displace conventional oil. To date production is paltry, and even if it doubled it would still be a minor quantity, albeit with some serious pollution issues.

Forgive me if I do not understand the oil business. However, the best estimates I can find for the energy invested to energy returned ratio for tar sands oil are 5.2-5.8/1 at the mine mouth. More energy must be expended to move this oil to refineries, refine, and distribute it. A mine mouth EROI of 5:1 provides a break even energy in/energy out ratio at the level of the end user according to Charles Hall in the Oil Drum. Society functions on energy surplus. Tar sands oil provide no substantial surplus. The amount of tar sands oil available is totally irrelevant. It must be subsidized by natural gas or conventional oil to provide an economic return. It can not stand alone meaningfully. It, like biofuels (though not to the same extreme), is something of a waste of water, good energy and environmental assets imo.

When we think of oil, we picture the gas tank analogy. When the needle reaches E for empty is when we are in trouble. The world does in fact have a trillion barrels of oil left to produce. The real analogy is like a Pearl Harbor reconnaissance plane flying its mission over the ocean. The plane flies as far as it can for as high as it can. The pilot fulfils the mission of aerial photography of enemy positions. At a certain point though the pilot knows he must turn around at the HALF WAY point of the gas gauge to make it back home. When the needle reaches at half the tank the pilot MUST RETREAT and DESCEND to make it back to base. When the world has produced as much oil as it ever can in one day (peaked), when it has flown as far as it can for as high as it can the world economy MUST RETREAT and DESCEND.